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The wholesale price index (WPI) has climbed to an 11 month high of 5.92 %. If the high international oil prices had been fully passed through, the inflation rate would have gone way beyond 7 %. The WPI has clearly entered a highly sensitive zone, politically speaking. As the opposition parties begin to up the ante on food prices, the government’s focus is expected to remain firmly on bringing inflation under control. But there is only so much the government can do if global prices of food, oil and other commodities are firming up.

You can ban edible oil exports, drop import duties on palm oil; put an export tax on steel, but there is a limit to which India can insulate itself from global price trends. Every growing economy is facing these supply constraints. Food supply cannot increase substantially in the near term. Oil prices have been rising for quite a while. The inflation rate for manufactures too has climbed to 5.4%. In fact, few realise core inflation in India has been above 4.5 % for quite some time now.
Even in China the Producer Price Index, representing manufacturing prices, has been above 6 %. So we have a situation where prices of food, oil and manufactures are rising together. Normally food prices tend to rise more as we head into the summer months. For the UPA government this is not good news as it faces several assembly elections in the latter half of the year followed by general elections next year.
The best it can hope for is a good Rabi crop and a good monsoon which may somewhat dampen inflationary expectations. Paradoxically, a slowdown in the economy may help in moderating the prices of manufactures. The UPA would rather prefer a more moderate growth rate with inflation under control. For businesses in general the current price rise could not have come at a worse time. Small businesses reeling from high interest rates were hoping the RBI would supplement the finance minister’s fiscal effort by a small cut in the bank lending rate.

The finance minister too had indicated his bias for a cut some time ago. But with the inflation rate at 5.92%, and expectations of further rise in food prices, it is doubtful whether the central bank will answer the prayers of small manufacturers anytime soon.